September 30, 2015

Canara Rebeco. Mutual funds.

The start of Sptember'15 was plagued by global headwinds both from developing and emerging markets, forcing the US FED to maintain status quo. This gave room for RBI to cut policy rates, and they positively surprised by delivering a 50 bps rate cut. RBI maintained a dovish stance suggesting that monetary policy will continue to be accommodative, and rate cut cycle is likely to continue. The month also saw slew of positive macroeconomic data in terms of growth in IIP and declining inflation.

Market Performance*

Equity markets were range bound in the last month owing to concerns over slow pace of global growth and timing of US rate hike. Towards the end of the month markets rejoiced at the surprise 50 bps rate cut by RBI. The bellwether indices, CNX Nifty and S&P BSE Sensex, fell marginally by 0.28% & 0.49% respectively.


The Index of Industrial Production (IIP) clocked in a robust growth rate of 4.2% (Y-o-Y) in July'15 compared to 4.4% in June'15 (revised). The pickup in growth was primarily driven by double digit expansion in Consumer Durables (11.4%) and Capital Goods (10.6%) output on account of base effect. Additionally, basic goods registered a reasonable growth of 5.2%. On Sector front, growth in IIP was driven strong growth of 4.7% in the manufacturing output.


Wholesale price inflation (WPI) sunk to an all time low of -4.94% in August'15 compared to previous month's -4.05%. Consumer Price Index (CPI) edged down marginally to 3.66% in August'15 compared to 3.69% in the previous month. Core inflation (excluding food & beverages and fuel & light) moderated to 4.1% in August'15 from 4.3% in July'15. However, the decline in core inflation was offset by an uptick in fuel and food inflation.

RBI's Monetary Policy$:

The Fourth Monetary Policy Review saw RBI cutting the policy rate by 50 bps to 6.75%, exceeding market expectation of 25 bps rate cut. Additionally, RBI has proposed increasing the FPI limit, in phases, to 5 per cent of outstanding stock by March 2018. They will announce a hike in foreign investment limit in bonds every March, September. Foreign investment limits in debt will be fixed in rupee terms. This move is likely to enhance FPI participation in Indian bond markets. We expect that monetary policy will continue to be accommodative to bolster growth so long as inflation remains within the comfort zone of RBI. We believe that next rate cut is likely to be in the last quarter of FY2016.

Balance of Payment$$:

Current account deficit (CAD) for Q1FY16 came at US$ 6bn or 1.2% of GDP (higher than 0.3% in Q4FY15).The widening of deficit was mainly due to seasonal factors and declining exports. The slump in exports continued to persist, falling by 20.66% Y-o-Y in August'15 to US$ 21.27 billion. Despite the depreciation in INR, exports continued to decline due to the slowdown in major global economies. While imports contracted by 9.95% (Y-o-Y) due sharp decline in crude oil prices. Non-oil imports increased by 7.01 %( Y-o-Y) in August'15 compared to previous month. Overall the trade deficit declined to US$12.48 billion in August'15 from US$ 12.81 billion in July'15. Net capital flows for the quarter stood at US$17.6bn (Q4FY15: US$ 31.7bn) led by FDI and NRI deposit flows while portfolio flows and external commercial borrowings (ECB) were weak. Overall BoP added US$ 11bn to reserves, marking the seventh successive quarter of BoP surplus.


  • Post the surprise 50bps cut from RBI accompanied by a dovish statement, market is expecting further accommodation in coming quarter.

  • Increased FII limit is further likely to increase demand for domestic debt.

  • On other data, market participants may keenly watch USD/INR movement, crude oil prices and GDP for Q2FY16.

  • Another important trigger would be passing of key legislations viz. GST bill and Land acquisition bill..

  • Markets have already factored in the impact of US rate hike; however post announcement of rate hike markets are likely to be volatile due to temporary liquidity outflow.

* Bloomberg
## Ministry of commerce
$$ Edelweiss Securities

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Global factors overshadowed the positive developments in manufacturing growth & retail inflation for the better part of the month gone by. However the surprise 50 bps rate cut by RBI turned the tide in favour of domestic markets. The decision of US Fed to postpone rate hike was also viewed in positive light by investors. Indian equity markets which had fallen sharply during the last month recouped some of the losses.

Market Performance**

Indian equities were volatile during the past month. India's bellwether indices viz. S&P BSE Sensex & CNX Nifty fell marginally by 0.49% & 0.28% respectively while S&P BSE Mid- cap index & S&P BSE Small-cap index rose marginally by 0.60% & 0.45% respectively.

S&P BSE Realty, S&P BSE IT and S&P BSE Utilities were the top performing sectors during the month rising by 10.78%, 3.73% and 3.20% respectively. The market was dragged down by negative sentiments in the metals, consumer goods & telecom sectors.


India's manufacturing sector represented by Nikkei India Manufacturing PMI came at 52.3 in August'15 accelerating from 52.7 in the previous month. Despite the increase in manufacturing activity, the pace of expansion in new orders & output growth has decreased. However, a sharp decrease in stock of finished goods and increased buying by companies to replenish the stock, points towards a likely improvement in output in the coming months.

Buoyed by increase in new business activity Nikkei India Services Business Activity Index which tracks changes in activity at service companies on a monthly basis rose to 51.8 in August'15 from 50.8 in July'15.


Modestly beating market expectations, the Index of Industrial Production (IIP) rose by 4.2% (Y-o-Y) during July'15 compared to 4.4% (revised) in June'15. The sharp uptick in consumer durables and capital goods on account of favourable base effect is mainly responsible for the growth in IIP. Sector-wise mining, manufacturing and electricity rose by 1.3%, 4.7% & 3.5% respectively. Based on Use-based classification, basic goods, capital goods and intermediate goods recorded a growth of 5.2%, 10.6% and 1.5% respectively. Overall consumer goods expanded by 1.3%. The impact of robust growth in Consumer Durables was negated by the contraction witnessed in the Consumer non –durables.

FPI Outflows**

Continuing the trend witnessed in the last month, FPIs (Foreign Portfolio Investor) reduced exposure to India in the month gone by. The persistent worries over global slowdown, particularly concerns over economic slowdown in China led to the sell-off. On net basis foreign investors pulled out close to Rs. 6,500 Crs. from Indian equity markets.


On global front, the slowdown in commodity prices primarily led by the slowdown in China as well as the resultant moderation in growth of commodity export driven economies has placed India in a sweet spot compared to other BRICS nations (Brazil, Russia, India, China and South Africa). Additionally, the structural changes which are underway, relatively stable currency and improving growth - inflation dynamics make India an attractive investment destination for foreign investors.

Domestically, the unexpected move by RBI to decrease Repo rate by an additional 25 bps above market expectations and the resultant decrease in base lending rate of major banks is expected to be positive for corporates. Going forward, any reforms related announcement such an update on passage of Goods & Services Tax (GST) or Land Acquisition Bill would further cement the positive market sentiment.

We expect companies to benefit from the lower earnings base during the next two quarters. Going forward we believe that the top-line is likely to increase from the next financial year. In the near term markets are likely to remain volatile. Investors can adopt a staggered approach to investing in equities in order to even out market volatility.

**ICRA MFI Explorer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Though India saw Inflation continuing its trajectory of previous months and no rate hike by the US Fed, September' 15 will be remembered for RBI's decisive move to cut Repo rate in the fourth bi monthly policy by 50 basis points. Bond market had already factored in a 25bps rate cut, with expectations of FPI investment limit framework keeping the market poised. Not only did RBI lay down credible, time bound and dynamic FPI investment limit, the additional 25bps rate cut boosted bond market sentiment. On the global front, the commodity prices continue to be low and the global growth still seems to be subdued.

Fourth Bi Monthly Policy – A bag full of Surprises *

While the Reserve Bank's stance will continue to be accommodative, in the near term RBI is likely to work with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed. This was seen when a couple of PSU Banks reduced their base rates by 25 – 40 basis points. RBI further mentioned that the bank's HTM is to be reduced by 50 basis points from 22% to 21.50% from 09-Jan-2016. Thereafter, with a view to align SLR and HTM ceilings, the two reduced in staggered fashion by 25 basis points each per quarter till Mar-17.

RBI further announced a framework for increasing foreign investment limit in bonds every March, September. Foreign investment limits in debt will be fixed in rupee terms. RBI has proposed increasing the FII limit, in phases, to 5% of outstanding stock by March 2018. RBI further created special limit for State development loans (SDL) for up to 2% of outstanding stock by March 2018. In the immediate future, G-Sec limit of Rs. 130 billion and SDL limit of Rs. 35 billion will be released by Jan 1 2016.

Retail inflation decelerates further *

CPI inflation printed at 3.66%, a nine-month low in August 2015, recording a negligible decline of 3 basis points (bps) compared to the revised inflation of 3.69% in July 2015. Core-CPI inflation eased for the second consecutive month to 4.1% in August 2015 from 4.3% in July 2015, the impact of which was offset by a firming up of fuel inflation (to 5.7% from 5.4%) and, to a smaller extent, food inflation (to 2.9% from 2.8%). Rural and urban CPI inflation displayed disparate trends; rural CPI inflation inched up to 4.5% in August 2015 from 4.4% in July 2015, whereas urban CPI inflation eased to 2.7% in August 2015 from 2.9% in July 2015. The subdued extent of the pickup in food inflation in August 2015 relative to the previous month despite the considerable worsening of monsoon dynamics, as well as the drop in core CPI inflation for the second month in a row (to 4.1% in August 2015 from 4.8% in June 2015) are however encouraging.

Fiscal Surplus – A sign to cheer about~

India recorded a fiscal surplus of Rs. 158 Billion Aug 15 vs a deficit of Rs. 730 Billion in the same month last year. The total revenues increased by 53.5% Y-o-Y by an actual increase of Rs. 512.5 Billion. This was backed by a decrease in the total expenditure by 22.3% Y-o-Y which was down by Rs. 375.6 Billion. The Apr- Aug 2015 Fiscal deficit narrows to Rs. 3693 Billion which stands at a 66.5% of annual budgeted fiscal deficit for FY 2016 vs a 74.9% print reported for the corresponding period last year. The increase in the tax revenues led by the increase in the excise duty and the disinvestment in IOC were the reasons for the elevated receipts over the same period last year. The drop in expenditure shows continued government's efforts to meet the fiscal deficit target for FY16.

Liquidity within comfort zone *

The liquidity deficit as measured by LAF, MSF and the Standing Liquidity Facility availed from RBI added together was at surplus of Rs. 1.19 crs as on 29th September, 2015 compared to deficit of Rs. 1.08 crs as on 15th September, 2015. Liquidity towards the quarter end continued to remain in comfort zone on due to robust FX flows and good deposit growth whilst slowdown in credit growth.

Outlook ~*

  • This 50 basis points reduction in the interest rates may be viewed as a drastic decision which has been taken by RBI, as earlier they were happy to do 25 bps cuts. Most likely RBI foresees inflation undershooting its own projections, likely driven by continued disinflation in commodities and weak global growth and likelihood that global commodity prices will likely remain lower for longer. RBI may have also gone for a 50 basis point cut to support domestic investment cycle to offset impact of slowing global demand. Further RBI believes that government is likely to remain committed to fiscal consolidation and continue to improve quality of government spending.

  • Given RBI's emphasis on faster transmission and comfortable liquidity in the system, banks may continue lowering their deposit rates. While banks' base rates are expected to come down by additional 25-50 basis points over next one year, on account of earlier rate cuts, the full benefit of current rate cut of 50 basis points (in terms of cut in base rate by banks) will be dependent on RBI's new guidelines on base rate, which are likely to be applicable from April 1, 2016.

  • Even after this move the spread between repo and 10 Year Benchmark Bond is still around 85 basis points. We expect further rate cuts in future, as we expect inflation to undershoot Jan'16 target of 5.8 %. Hence we continue to expect 10 Year rates to drop further from here. Barring few episodes of global risk aversion, near term 10 Year Benchmark Bond is likely to trade between 7.40-7.65% levels.

  • We believe that this sharp rate cut only underscores that rates in India still remain high, and with disinflation still entrenched in the global economy, and there is need to bring rates even lower to support sustainable growth in an environment of low inflation. We expect RBI to cut rates up to 75 – 100 basis points in the next 12-18 months.


Mutual Fund investments are subject to market risks, read all scheme related documents carefully.